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The Deal: SEC Rule on Advertising May Be Too Tough for Startups

Written by: The Deal07/26/13 - 5:00 AM EDT

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NEW YORK (TheStreet) - The Securities and Exchange Commission's proposed rule that would require private placement issuers to file general solicitation and advertising materials with the commission could lead small companies to raise less capital, rather than more, under the common securities law provision that many currently use.

That is the opinion of numerous entrepreneurs and advocates for startup companies, expressed in interviews and in letters filed with the SEC as comments on the proposal.

Sara Hanks, co-founder and CEO of CrowdCheck Inc., said in a lengthy, July 6 letter to the SEC that the commission is unlikely to receive all the solicitation materials it is expecting because many small securities issuers don't understand the nuances of the securities laws. CrowdCheck, based in Alexandria, Va., provides due diligence and disclosure services in small, online securities offerings.

"This imposes a significant burden on the founders of small issuers, whose focus should be on running their companies and making sure that their communications are complete and accurate, not on uploading large, continually changing files to the commission," Hanks wrote.

Proposed Rule 510T was published for public comment on July 10. It would require private placement issuers relying on Rule 506(c) of the Securities Act to file written general solicitation materials with the SEC.

The filings would be made through an intake page on the SEC website no later than the date of the first use of the materials. The filing requirement does not apply to oral communications. Filings would not be available to the general public and would expire after two years, under the proposal.

The SEC made the proposal on the same day that it approved a rule to eliminate the ban against general solicitation and advertising of private placement offerings.

Congress had required the SEC to end the general solicitation ban under the Jumpstart Our Business Startups Act, which was signed into law in April 2012. Ending the ban was one of numerous provisions of the JOBS Act that was meant to make it easier for small companies to raise capital. The SEC wants the 510T filings in order to gather information about how general solicitation and advertising develops in the private placement market. The commission plans to use the information to make any necessary changes to protect investors from market abuses.